Home Construction loans - Financing your dream

You have visualized it in your mind, you have imagined walking through the halls and rooms, and you have even furnished it in your sleep. Your dream home has been a long term goal. You have known what it will look like for years. You have had the plans in your possession for what seems like forever. You finally managed to buy the lot that you have been keeping your eye on and you are ready to build your dream home but now you are faced with the hardest part, how do you finance your dream? What is involved in a construction loan? How does a construction loan differ from a conventional mortgage?

In a conventional mortgage you are required to get approval based on your credit, your assets and your liabilities. In a home construction you loan you not only need to qualify on these issues but you also need to be approved on the project itself. The bank has to be willing to finance your dream, and see the finished home in their mind. The bank basically grants you permission to build your dream the way you envision it.

Typically you will be required to provide at least 5% down on the project. This may be cash or financing on the equity you have in the land.ï¿½ When you have paid your down payment and the bank has approved the construction loan the bank sets up a payment schedule with the contractor. By the way the bank has usually approved the builder as well.ï¿½ This payment schedule usually follows a predetermined set of payment dates. These payments or draws are based on a scheduled inspection of the project prior to additional payments being made, and the payments are made to the builder directly.ï¿½ This assures the bank that the home is indeed being built and to the specifications approved by the bank.

Home construction loans have several different methods of terms and payments. There are basically three major construction loan types; these vary based on what occurs after the house is built. The bank determines whether you will have to reapply for a second loan after the home is built. (This will be explained further.)

The first type of Home construction loan is a One Time Close construction loan.

ï¿½This loan works exactly as the name implies. There is one close and one single rate for both the dream building stage and the live in and end financing stage. In most cases a set length of time has been approved for the construction, such as 12 months. There are penalties if the building extends beyond this term.

The second type of Home construction loan is known as a Note Modification Construction loan.

This looks a lot like the previous one with a few exceptions. Typically there are two separate rates.ï¿½ The first rate is for the period of construction and the second rate is for the end financing. The construction rate is usually fixed and the end rate is either locked or variable. Occasionally there are fees connected with the modification but these are still considerably less than a second settlement.

The third and final type of Home Construction loan is called a Two-time close construction loan.

ï¿½This loan works exactly as you would expect. There is one closing to finance the home construction loan and a second closing to refinance the construction loan into a final mortgage. While the costs associated with this type of home construction loan are typically higher there is a bit more flexibility. In most cases you will be able to get a lower rate on the final mortgage than you had on the construction phase. The other major benefit to this is that you are not locked into an end loan amount as you are with the other types of construction loans.

So now that you have the land and are ready to finance your dream be prepared to know what kind of home construction loan you desire. No matter what type of construction loan you choose you will know what to expect when it comes to financing your dream.